This Week In Securities Litigation (Week of Sept. 14, 2020)
The CFTC published a first of its kind report this week, warning about the dangers the environment presents to the future of financial stability. Action now by regulators and the private sector, using available legal and financial structures while new ones are created for the future, is critical. Failure may well spell disaster for the economy. The Monetary Authority of Singapore published Guidelines to strengthen a Culture of Responsibility and Ethical Behavior in the Financial Industry.
The Commission’s enforcement program spawned cases that are consistent with its current main street investor focus: cherry picking by an adviser; elder fraud by another; failing to disclose hidden fees to clients; and the misappropriation of client funds.
Be safe and healthy this week
Rules: The Commission announced on September 11, 2020, that new rules regarding bank disclosures had been adopted. The new provisions expand the statistical disclosures that bank and savings and loan registrants are required to make (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive actions and 2 administrative proceedings last week, excluding 12j and tag-along-proceedings.
Cherry picking: SEC v. RRBB Asset Management, LLC, Civil Action No. 2:20-cv-12523 (D. N.J. Filed Sept. 10, 2020) is an action which names the registered investment adviser and its CCO, Carl Schwartz, as defendants. Over a period of several months, beginning on August 2016, Defendants disproportionally allocated profitable trades to their then new client. A statistical analysis showed that it was most unlikely that the allocations were not made intentionally. The point was to impress the new, high wealth client. It also made substantial profits for the advisory. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Sections 17(a)(1) and (3) and Advisers Act Sections 206(1) and (2). The case is pending. See Lit. Rel. No. 24894 (Sept. 10, 2020).
Financial fraud: SEC v. Tangoe, Civil Action No. 3:18-cv-01479 (S. Conn.) is a previously filed action which names as a defendant Donald J. Farias, a former Senior Vice President of Expense Management Operations for Tangoe Inc. Over a period of about two years, beginning in 2013, Defendant overstated revenue through various improper methods such as reporting it prematurely or for transactions that did not produce any revenue. Over the period about $40 million was improperly recognized. Defendant resolved the action, consenting to the entry of a final judgment that imposes a permanent injunction based on Securities Act Sections 17(a)(1) and (2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). In addition, he is barred from serving as an officer or director of a public company for five years and will pay a penalty of $40,000. See Lit. Rel. No. 24893 (Sept. 10, 2020).
Insider trading: SEC v. Kirsch, Civil Action No. 20-cv-61830 (S.D. Fla. Filed Sept. 10, 2020) is an action in which Richard Kirsch and Adam Terris profited from trading while in possession of inside information about the firm that employed them, PetMed. Over a period of about four years, beginning in late 2014, Mr. Kirsch repeatedly trading in advance of the disclosure of market moving information. In one instance in March 2017 Defendant Kirsch purchased PetMed call options with funds he borrowed from Mr. Terris. He then gave the trading profits of over $727,000 to Mr. Terris. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action each Defendant consented to the entry of a permanent injunction based on the section cited in the complaint and to the entry of a five-year officer and director bar. Mr. Kirsch agreed to pay a penalty of $1,057,392. Mr. Terris will pay $1,454,800. See Lit. Rel. No. 24892 (Sept. 10, 2020).
Elder fraud: SEC v. Rodemer, Civil Action No. 1:20-cv-02687 (D. Colo.) is a previously filed action which names as a defendant Steven Rodemer, an investment adviser to an elderly client. Over a period of years, beginning in 2012, Defendant used his control over the elderly client to misappropriate her funds and use her credit card to pay his personal expenses. Overall, he misappropriated over $450,000. Defendant settled the case, consenting to the entry of a permanent injunction based on Advisers Act Sections 206(1) and 206(2). He also agreed to pay a penalty of $385, 536. See Lit. Rel. No. 24891 (Sept. 10, 2020).
Elder fraud: SEC v. Dang, Civil Action No. 3:20-cv-01353 (D. Conn. Sept. 10, 2020) is an action against Hai Khoa Dang who had served as an investment adviser for an elderly couple for 20 years. He left his last firm in 2006. Nevertheless, Defendant continued to act as an adviser. Over the last several months he convinced the elderly couple to open a brokerage account and allow him to trade. While he agreed to maintain a certain minimum amount in the account and trade conservatively, in a short period the value of the account dropped from over $2 million to about $145,000. Mr. Dang furnished various explanations to the clients as excuses. By November 2019 the account balance had been reduced to about $27,000. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). See Lit. Rel. No. 24890 (Sept. 10, 2020).
Offering fraud: SEC v. Sperry, Civil Action No. 2:20-cv-01337 (W.D. WA. Filed Sept. 6, 2020) is an action which names as defendants Kirk Sperry and Sperry and Sons Capital Investments, LLC. The firm is a hard money lending firm. In late 2015 the firm marketed a real estate development called Fendee Estates Phase II in Williston, North Dakota. Two investors were told that the deal was secured. The two investors put in $125,000. In fact, the representations were false. Much of the money was diverted to other projects. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a)(1) and (3). The case is pending. See Lit. Rel. No. 24889 (Sept. 9, 2020).
Conflicts: In the Matter of Graham, Bordelon, Golson & Gilbert, Inc., Adm. Proc. File No. 3-19973 (Adm. Proc. File No. 3-19973 (Sept. 10, 2020) is a proceeding which names as a respondent the registered investment adviser. Over a two-year period, beginning in March 2014, Respondent purchased, recommended, or held for advisory clients, mutual fund shares that carried 12b-1 fees. While the firm was eligible it did not participate in the Commission’s cooperation initiative. The order alleges violations of Advisers Act Section 206(2). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. The firm will also adopt certain undertakings and pay disgorgement, prejudgment interest and a civil penalty totaling $176,399.21. A fair fund was created to distribute the money.
Misappropriation: In the Matter of Alexander S. Gould, Adm. Proc. File No. 3-19965 (Sept. 8, 2020) is a proceeding which names Mr. Gould as a respondent. Over a four-year period, beginning in 2013, Respondent was the managing member of a venture capital fund. During the period he spent almost $800,000 of the firm’s money on personal expenses. In December 2017 Mr. Gould resigned, promised to repay the money and an additional $100,000. He then formed Golden Boy and secured seven investors who put almost $875,000 into the business. The firm was supposed to buy interests in private, early-stage companies. Over the next several months Respondent used Golden Boy’s assets to repay his debt to the first fund. Respondent also used Golden Boy’s funds to pay his personal expenses. The Order alleges violations of Advisers Act Sections 206(1) and (2). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. He also agreed to be barred from the securities business with the right to apply for re-entry after five years. Respondent will pay disgorgement of $476,033.19, prejudgment interest of $50,137.333 and a penalty of $200,000. A fair fund was created to hold the funds.
Report: The CFTC published a report titled Managing Climate Risk in The U.S. Financial System, published by the U.S. Commodity Futures Trading Commission, September 9, 2020 (here). It was prepared by the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the CFTC. The report concludes that climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy . . .” Immediate action is required. It lists a series of steps that regulators, in consultation with the private sector, should initiate now.
U.S. v. Kamensky, No. 1:20-mj-09381 (S.D.N.Y. Filed Sept. 3, 2020); SEC v. Kamensky, Civil Action No. 1:20-cv-07193 (S.D.N.Y. Filed Sept. 3, 2020). Daniel Kamensky is the founder and manager of New York based hedge Fund Marble Ridge Capital. Mr. Kamensky became a member of the Official Committee of Unsecured Creditors in the bankruptcy proceedings for Neiman Markus, once a top tier department store chain. As a member of the Committee Mr. Kamensky had a fiduciary duty to act in the best interest of all the unsecured creditors. Eventually he became co-chair of the Committee. The hedge fund founder was very familiar with his obligations as a committee member, having practiced law in the area with a major New York City law firm. The Committee negotiated with the owners of the department store chain during the course of the proceedings to obtain securities known as MyTheresa Series B Shares. Ultimately, the Committee was successful in coming to a settlement on the point, obtaining 140 million shares of MYT Securities for the benefit of certain unsecured creditors of the bankruptcy estate. In July 2020 Mr. Kamensky negotiated with the Committee for Marble Ridge to purchase a portion of the securities. He offered 20 cents per share for the MYT Securities from an unsecured creditor who preferred cash rather that the securities as part of the settlement. At the end of July Mr. Kamensky learned that a New York City financial services company had informed the Committee it would bid between 30 and 40 cents per share for the securities. Later the same day Mr. Kamensky sent a message to a senior trader for the financial services company telling him not to place the bid. During a subsequent telephone conversation, held on the same day, Mr. Kamensky told the trader that his hedge fund should have the exclusive right to purchase the securities. After noting that Marble Ridge had been a client of the financial services firm, the attorney stated that if the services firm moved forward with its bid for the securities, the client relationship would end. Mr. Kamensky also stated that as co-chair of the Committee he would use his influence to block the bid. The financial services company dropped its bid, but only after informing counsel for the Committee of his discussions with attorney Kamensky. Later the same evening Mr. Kamensky called an employee of the financial services firm and tried to convince him to falsely state that the person had been mistaken about the intent of the attorney. At one point the attorney told the employee he could go to jail if the conversation was revealed. Later, during an under oath interview with the Office of the U.S. Trustee, Mr. Kamensky stated he made a “horrible” mistake. The attorney resigned his positions and told investors in the fund to begin winding matters up. He has been charged with securities fraud, wire fraud, extortion and obstruction of justice. The criminal case and the SEC’s civil case are both pending.
Culture: The Monetary Authority of Singapore issued Guidelines to Strengthen Culture of Responsibility and Ethical Behavior in the Financial Industry (Sept. 10, 2020)(here).
Report: The Financial Conduct Authority published its Annual Report and Accounts for 2019/2020 on Sept. 9, 2020 (here).
Remarks: Lisa Osofsky, Director of the Serious Fraud Office, delivered remarks at the Cambridge Symposium on Economic Crime on Sept. 7, 2020 (here). In her remarks the director reviewed the work of her agency in the context of her key challenges of expanding cooperation with the UK and international partners, utilizing technology, expanding the intelligence capability and to bring greater focus to their investigations.